The Hindu Business Line : Small cars deserve a large heart

WHEN the Finance Minister, Mr P. Chidambaram, said at the annual general meeting of the Society of Indian Automobile Manufacturers(SIAM) on September 1 that the Government was considering revisiting the taxation structure on small cars, few expected immediate action.

Lo! The Government has already constituted a task force to look at the opportunity for India to emerge as a global manufacturing hub for small cars and one of the important terms of reference of the task force is to suggest ways in which this can be done.

One sure fire way of boosting small car manufacture and expanding its market is by lowering taxes such as excise duty and State sales taxes. With excise duty on cars at 24 per cent and myriad other cesses, there is ample scope for reduction. Indeed Mr Chidambaram did hint at the SIAM meeting that the Government was considering reducing the excise duty on small cars to give a boost to the segment.

Vertical division

Interestingly, the idea of a cut in excise duty on small cars appears to have divided the industry vertically, with those interested in the business supporting it and the rest voicing their opposition. The latter says that this will skew the sales pattern by diverting those who would otherwise have gone for a sedan to the small car segment.

Now, this is a classic half-truth, if there ever can be one. It is indeed correct to say that fiscal incentives or lower taxes can drive sales of the beneficiary segment but that is assuming all other things are equal between the beneficiary product segment and the competing ones.

Now how can we say that the Maruti Alto or the Tata Indica is similar to let's say, a Ford Ikon or a Toyota Innova? They are totally different product segments that attract two different categories of buyers.

A small car buyer is someone who is looking for a family vehicle that is affordable and typically is someone graduating from a two-wheeler to a car. A sedan buyer is someone who is not just looking for family mobility but comfort, class and above all, a social statement. He is also someone who probably already owns a small car. In other words, the clientele for the two are vastly different. So how can we assume that concessions to one segment can affect sales in the other? Is it conceivable that a Chevrolet Optra buyer would go for a Maruti Alto?

Second, a cursory look at the car sales figures would clearly show that small cars account for the largest share of total cars sold in the country. As per latest available data, small cars account for 65 out of every 100 cars sold in the country. Clearly, this is a mass market, which deserves fiscal concessions for faster growth.

From a larger development perspective as well, small cars deserve to be promoted. For one, they are better in fuel efficiency and occupy lesser road space compared to their bigger brethren. Given the chaotic traffic conditions on the roads of any Indian city, a small car is a better commuting option any day compared to a larger one. Small cars also score from a social perspective, as they are easily within reach of the growing middle-class in the country.

It is for reasons such as these that even an advanced country such as Japan thought it fit to extend fiscal concessions for cars with engine capacity of 660 cc and below. The Suzuki Wagon R, which is powered by a 1.1 litre engine in India, is sold with a 660 cc engine in Japan.

Definition critical

Of course, a lot depends on how a small car is defined in the Indian context. It can be defined based on length or engine capacity. The Auto Policy 2002 defines a small car as one up to 3800 mm or 3.8 metres in length. The question is whether the definition should be a combination of length and engine capacity. If engine capacity comes into the calculus, a lot would depend on where the limit is pegged.

Assuming, for instance, that a small car is defined as one with an engine of one litre capacity or less, which would leave most of the small car models out of the concessional bracket. At present, only the Alto, Zen and the Maruti 800 would qualify for this definition, leaving the Santro, Indica and Wagon R out in the cold.

The definition is, therefore, crucial and on it would hang the fortunes of a number of the popular models being sold today. It is, therefore, not surprising that the lobbying has begun in right earnest with car manufacturers going on record with their displeasure on the move to restructure duties.

It is early days yet and the policy may evolve differently with some concessions thrown in for the other segments of the car industry as well. To be sure, the debate and lobbying that is on now is not a bad thing at all. For a change, it democratises the process of taxation and hopefully, when Mr Chidambaram announces his decision, it will reflect the majority views of the industry and the consumers.

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